Systemically Important Banks and Loan Performance: Evidence from India

We examine whether designating banks as systemically important affects loan performance in an emerging-market setting where such banks are large domestic institutions and market imperfections make monitoring crucial for loan performance. Using loan-level data and the staggered designation of banks as Domestic Systemically Important Banks (DSIBs) in India, we find that loan performance deteriorates following DSIB designation. The evidence points to bank-level moral hazard as the underlying mechanism: DSIBs reduce postorigination monitoring and weaken loan recovery efforts. Borrowers respond accordingly, exhibiting poorer financial health and loan repayment, particularly on loans extended by DSIBs. This paper was accepted by Jan Bouwens, accounting. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.03238 .